The Canada Revenue Agency recharacterized an independent contractor as an employee
The Insurance Institute of Ontario is a non-profit organization that provides professional and continuing education to the insurance industry in Ontario. From January 2015 to March 2018, the institute entered into a series of contracts with Mr. Barlow that clearly set out the intention for both parties to have an independent contractor relationship. The Canada Revenue Agency (the "CRA") disagreed and recharacterized Mr. Barlow as an employee, and issued a ruling to that effect. The institute appealed the decision to the tax court which ruled in favor of its position.
Central issue is how to properly interpret the two-step test set out in 1392644 Ontario Inc. v The Queen ("Connor Homes")
There is a two-step test set out by the Federal Court of Appeal in Connor Homes to decide the nature of the relationship between a payor and a worker:
- Whether there is a subjective intention between the payor and worker regarding the working relationship;
- Whether an objective reality sustains the subjective intent of the parties by examining the factors (level of control, ownership of tools, chance of profit and risk of loss) set out in Federal Court of Appeal's decision in Wiebe Door Services Ltd v The Queen ("Wiebe Door") and 671122 Ontario Ltd. v Sagaz Industries Canada Inc. ("Sagaz").
The institute and the CRA disagreed on how the second step should be applied. The CRA argued that the second step was entirely independent of the results of the first step while the institute submitted that if the first step indicated a common intention between the parties, then the second step must involve something other than a routine application of those factors.
The tax court reviewed the decision in Connor Homes and sided with the institute. In the court's opinion, the first step must have a bearing on the second step, otherwise there is no purpose for the first step to be there. The tax court also cited the Federal Court of Appeal's reasoning in Porotti v The Queen where the parties share a common intention, the second step of the Connor Homes test should focus on whether the Wiebe Door and Sagaz factors indicate a relationship similar to what one would expect from the relationship the parties intended. Therefore, the tax court concluded the following approach to interpret the two-step test:
- Where the payor and the worker do not share a common intention, their relationship will be the relationship indicated by the Wiebe Door and Sagaz factors;
- Where the payor and worker share a common intention:
- If the Wiebe Door and Sagaz factors are consistent with that common intention, then their relationship will be the relationship they intended;
- If the Wiebe Door and Sagaz factors are completely inconsistent with that common intention, then their relationship will be the relationship indicated by those factors; and
- If the Wiebe Door and Sagaz factors are inconsistent with that common intention but the parties nonetheless act and carry on their relationship in a manner that is similar to what one would expect from their intentions, then their relationship will be the relationship that they intended.
The integration test is no longer relevant
The CRA also submitted that the integration test is a factor that should be considered in the second step of the Connor Homes test. The tax court, on the other hand, ruled that the integration test was no longer relevant as it had been dead for more than 30 years and it tended to artificially skew the determination towards a conclusion that a worker was an employee.
Application of the Connor Homes test
Given that there was a common intention between the institute and Mr. Barlow, the tax court decided to apply a lesser standard and examined the Wiebe Door and Sagaz factors to decide whether they were consistent with their common intention.
1. Level of control
The tax court found the following facts indicate an independent contractor relationship:
- Barlow had the ability to change class hours slightly as circumstances required;
- Barlow had total control over how he taught the curriculum;
- Barlow was paid at the end of each course which was a strong indicator of an independent contractor relationship as employees are generally paid weekly or bi-weekly rather than after 3 months.
However, the court also found the following factor leaned towards an employee relationship:
- Certain provisions in the contract stated the instructor must not "contravene any other rules which may be put in place by the Institute from time-to-time", which suggested a significant desire from the institute part to maintain control.
Overall, the tax court found the level of control support neither an employee nor an independent contractor relationship.
2. Ownership of tools
The tax court found that Mr. Barlow used his laptop and printer/scanner to prepare for his classes while maintaining the ownership of all of the slides, handouts and worksheets. However, the institute also provided the textbook and student resource guide for the classes and the facilities in which the classes were taught. The court eventually determined this factor was neutral.
3. Chance of profit
The court found that although Mr. Barlow may not have had a true ability to profit, he did have the ability to increase his effective earnings in manners similar to that of an independent contract and offer his services to competitors and negotiate for a higher rate of pay. Therefore, the tax court concluded this factor indicated an independent contractor relationship.
4. Risk of loss
The tax court found Mr. Barlow had a relatively minor risk of financial loss that was consistent with the parties' intention for him to work as an independent contractor. For example, he was not paid for cancelled classes and was paid based on the number of students enrolled in his classes. Although he had steady work from the institute, there was no obligation on the institute to continue to work with him. Overall, the court found this factor favored an independent contractor relationship.
In conclusion, the court ruled all 4 factors in Mr. Barlow are similar to what one would expect from an independent contractor as he conducted his affairs in a business-like manner.
Pro tax tips - have a written agreement that sets out the intention of the parties
One of the biggest advantages for an independent contractor is the variety of tax deductions that are not available to employees. As is shown in the case, our top Canadian tax lawyers can draft a written agreement because a shared common intention in writing provides an extra layer of protection because it allows the court to apply a less stringent test to decide the nature of the working relationship. If you disagree with the CRA's recharacterization of your working relationship, contact our office to speak with an experienced Canadian tax lawyer for guidance.
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